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Archived - Improving Access to Financing and Strengthening Canada's Financial System

Highlights

• The Government has taken unprecedented action to improve the availability of financing for households and businesses in Canada.
• The Government is providing broad-based financing support to lenders, as well as more direct support for particularly hard-hit areas of the financing market.
• Financing support of $131 billion has been provided, all of it on a commercial basis to protect the taxpayer.
• The Government's actions have contributed significantly to improved liquidity and credit conditions, assisting households and businesses across the country.
• Financial institutions now have ample funding to lend to creditworthy borrowers, and the Government's financial Crown corporations are playing a strong role in providing support.
• Average effective interest rates paid by households and businesses have fallen significantly.

Improving Access to Financing

Canadians need access to affordable financing for their homes, cars and businesses. The level of interest rates and access to loans influence how Canadians invest and spend their money, which drives our economy and promotes job creation. Strong financial conditions are vital for a sustained recovery in Canada and elsewhere in the world.

The Canadian financial system withstood the global financial crisis better than most. Indeed, the World Economic Forum's 2009–2010 Global Competitiveness Report recently ranked Canada as having the world's soundest banking system. This is the second year in a row that Canada has received this ranking.

The global crisis, however, made it difficult for Canadian banks and other lenders to obtain funds from international markets at reasonable costs. To soften the impact of this crisis, Canada's Economic Action Plan has taken measures to provide up to $200 billion to support lending to Canadian households and businesses through the Extraordinary Financing Framework. All facilities under the Extraordinary Financing Framework are operational, and the measures that are described below and summarized in Table 2.12 have contributed significantly to improved credit conditions in Canada.

Table 2.12
Progress in Implementing Support for Financing

	Financing Available	Elements in Place	Financing Provided Until Now
	(billions of dollars)		(billions of dollars)
Insured Mortgage Purchase Program	125	√	64
New 10-year Canada Mortgage Bond	10	√	8
Canadian Lenders Assurance Facility	N/A	√	N/A
Canadian Life Insurers   Assurance Facility	N/A	√	N/A
Crown corporation new flexibilities   including Business Credit   Availability Program	13	√	7
Canadian Secured Credit Facility	12	√	12
Bank of Canada	40	√	40
Total	200		131

In total, the Government has provided $131 billion in extraordinary support to improve access to financing for Canadian households and businesses, all of it on a commercial basis to protect taxpayers.

The Government's actions under the Extraordinary Financing Framework have contributed significantly to improved credit conditions. Consumer credit growth is strong and business credit remains stable. This stands in contrast to the situation in other major economies such as the U.S., where credit growth has slowed markedly.

In Canada, credit growth has been combined with significantly lower interest rates for borrowers. In response to the global financial crisis, the Bank of Canada reduced its policy rate by 425 basis points between July 2007 and April 2009 and has held it there since. The Government's measures to support access to financing have helped to alleviate market uncertainty and supported a dramatic reduction in interest rates. For example, a number of lenders have pointed to the Insured Mortgage Purchase Program as contributing to a significant decline in mortgage interest rates since last October. As a result, average effective interest rates for both households and businesses, as estimated by the Bank of Canada, have fallen by about 200 basis points since last fall.

Following extraordinary policy measures introduced by governments and central banks to support the financial system worldwide, financial market conditions have improved significantly since the start of the year. Improved financial market conditions in recent months have led to a rebound in bond and equity issuances, following several months of retrenchment in these activities (Chart 2.16). Meanwhile, the difference between corporate and government bond rates has narrowed considerably.

As conditions have improved, demand for certain measures under the Extraordinary Financing Framework has decreased. For instance, lenders have not participated as aggressively in the Insured Mortgage Purchase Program, and the extraordinary liquidity provided by the Bank of Canada stood at about $27 billion in mid-September, down from its peak of over $40 billion in December 2008. These programs, however, continue to be an important source of liquidity should normal sources of funding become less available. The Government is committed to maintaining the availability of the Insured Mortgage Purchase Program until the end of March 2010.

 

Direct Support for Small and Medium-Sized Business

The Government is continuing to work hard to help businesses find financing to fund growth and maintain jobs through the Business Credit Availability Program (www.fin.gc.ca/bcap). Since the Second Report to Canadians in June, Export Development Canada (EDC) and the Business Development Bank of Canada (BDC) have made further progress in providing loans and other forms of credit support under this program. As of the end of August, EDC and BDC reported total activity under the Business Credit Availability Program of about $2.7 billion, assisting almost 6,000 businesses. As illustrated in the tables below, the financial Crown corporations have provided assistance in regions all across the country and in all sectors of the economy, with a particular focus on small businesses. A sample of the success stories is found below. Program activity is expected to continue to increase.

Table 2.13
Support by Region

	Millions of Dollars	Number of Transactions
Western Canada	971	1,597
Central Canada	1,641	3,572
Atlantic Canada	112	752
Northern Canada	5	17
Total	2,729	5,938
Note: Totals may not add due to rounding.

 

Table 2.14
Support by Sector

	Millions of Dollars	Number of Transactions
Manufacturing	729	2,155
Wholesale and retail	232	969
Construction and infrastructure	109	369
Business/non-business services	111	826
Information technology and telecom	24	131
Extractive and resources	769	282
Transport and storage	225	243
Real estate	307	172
Tourism	207	594
Other	15	197
Total	2,729	5,938
Note: Totals may not add due to rounding.

 

Table 2.15
Support by Size of Borrower

Borrower Size (Sales)	Millions of Dollars	Number of Transactions
Less than $25 million	1,052	5,814
$25 million to $250 million	663	108
Over $250 million	1,014	16
Total	2,729	5,938
Note: Totals may not add due to rounding.

EDC and BDC also continue to play a significant role in lending to Canadian businesses more broadly during these difficult times. For instance, BDC experienced a record increase in loans to businesses during the first quarter of 2009–10. In the first quarter ending June 30, the total dollar amount of loans accepted by BDC's clients jumped 37 per cent compared to the same period last year, from $738 million in 2008 to just over $1 billion in 2009. This is the largest quarterly increase in BDC's history, reflecting new initiatives it has taken on to assist in easing access to credit for entrepreneurs and stimulating the economy. EDC's business volume in the first half of 2009 was $38.2 billion, up more than $2.4 billion over the same period in 2008, with more than 7,530 exporters and investors using its products or services through June 30, 2009, compared to 6,818 in 2008.

Support for Vehicle and Equipment Financing

The Canadian Secured Credit Facility is designed to support the financing of vehicles and equipment and to stimulate private lending to these sectors. Under the facility, the Government has committed to purchase up to $12 billion of newly issued term asset-backed securities backed by loans and leases on vehicles and equipment and dealer floor plan (inventory financing) loans. There is evidence that the facility is having a positive impact on the availability and cost of financing for vehicles and equipment. The changes to the program announced on September 17 will further enhance the availability of financing for the sale of vehicles and equipment, supporting key manufacturers and Canada's economic recovery.

Progress in implementing other initiatives under the Extraordinary Financing Framework can be found in Table 2.16.

Strengthening Canada's Financial System

Canada's financial system has shown exceptional stability throughout the crisis and has become a globally noted leader in best banking practices. The International Monetary Fund noted in March that while financial conditions in Canada have tightened, "strains are considerably less severe than in other major countries, and credit growth remains solid, both of which reflect a resilient financial system."^[2]

While the Extraordinary Financing Framework provided an immediate response to alleviate the impact of the global credit crunch in Canada, Canada's Economic Action Plan also contained initiatives to strengthen Canada's financial system and modernize the regulatory framework going forward. There has been further progress on these initiatives since the Second Report to Canadians in June.

Helping Consumers of Financial Products

Credit Card Regulations: The credit card regulations will be published in the Canada Gazette, Part II shortly. The new regulations are aimed at limiting business practices that are not beneficial to consumers and at providing clear and timely information to Canadians about credit cards.

Financial Literacy: On June 26, 2009 the Government of Canada announced the establishment of Canada's Task Force on Financial Literacy to help create a cohesive national strategy to support initiatives across Canada aimed at improving financial education.

The task force is comprised of 13 members, including the Chair and Vice-Chair. It is chaired by Donald A. Stewart, Chief Executive Officer of Sun Life Financial Inc., and L. Jacques Ménard, Chairman of BMO Nesbitt Burns, is the Vice-Chair. The task force will make recommendations to the Minister of Finance on improving the coordination of financial literacy efforts, outlining a national strategy. The task force is expected to deliver its findings in the fall of 2010. It will make its report available to the public, as well as any research commissioned to develop its recommendations.

More information on the task force is available at www.financialliteracyinCanada.com.

Mortgage Insurance: On August 8, 2009, regulations were pre-published in the Canada Gazette, Part I that will enhance disclosure to consumers about the characteristics of mortgage insurance and that will set out new measures to ensure that Canadians are charged no more for mortgage insurance than the true cost of obtaining that insurance. The comment period for these regulations ended on September 7, 2009. The Government is now reviewing the input received and will be finalizing these regulations.

Establishing a Canadian Securities Regulator

Establishing a Canadian securities regulator will help to strengthen Canada's financial system. A Canadian securities regulator will better protect investors by improving enforcement, reducing the compliance burden faced by market participants, and providing clear national accountability for capital markets regulation, while enhancing Canada's financial stability framework.

Given its importance, the Government of Canada committed in Budget 2009 to move forward quickly with willing provinces and territories to establish a Canadian securities regulator that respects regional interests and expertise as well as constitutional jurisdiction. As an important first step, the Government indicated its intention to establish and fund an office to manage and lead the transition to a Canadian securities regulator.

The Government announced the launch of the Canadian Securities Regulator Transition Office on June 22, 2009. The Transition Office has a strong mandate to lead all aspects of the transition, including the development of a Canadian securities act, collaborating with provinces and territories, and developing and implementing a transition plan with respect to organizational and administrative matters. The Transition Office has three years (with the possibility of a one-year extension), and a total budget of $33 million, to effect the transition.

The Transition Office is headed by Douglas Hyndman, who is its Chair and Chief Executive Officer, and Bryan Davies, who is Vice-Chair. Both individuals bring significant expertise and experience to the initiative. Mr. Hyndman has been Chair of the British Columbia Securities Commission since 1987. He is also Chair of the Accounting Standards Oversight Council. Mr. Davies is Chair of the Canada Deposit Insurance Corporation, which is a key pillar in Canada's financial stability framework, and will continue in this part-time capacity. Prior to this appointment, he served as Chief Executive Officer and Superintendent of the Financial Services Commission of Ontario.

The Government plans to announce shortly the launch of the Advisory Committee of Participating Provinces and Territories. The Advisory Committee will be responsible for providing advice to the Transition Office to ensure that the views of participating provinces and territories are properly represented as work is undertaken to transition to a Canadian securities regulator.

Federally Regulated Private Pension Plans

On June 12, 2009, regulations providing temporary solvency funding relief measures for federally regulated defined benefit plans came into force. These measures, which were proposed in the 2008 Economic and Fiscal Statement and in Budget 2009, will:

• Extend the solvency funding payment period by one year for deficiencies reported as of year-end between November 1, 2008 and October 31, 2009.
• Extend the solvency funding payment period to 10 years from 5 years with the agreement of members and retirees.
• Extend the solvency funding payment period to 10 years from 5 years when the difference is secured with a letter of credit.
• Extend the solvency funding payment period to 10 years from 5 years for agent Crown corporations with terms and conditions to ensure a level playing field.
• Allow asset smoothing above 110 per cent with the difference in payments subject to a deemed trust.

The Government also held extensive consultations on the legislative and regulatory regime for federally regulated private pension plans during the first half of 2009. The consultations were initiated with the release of a consultation paper in January followed by public consultation meetings led by the Parliamentary Secretary to the Minister of Finance, Mr. Ted Menzies, in March and April across Canada. The Government intends to introduce changes to the legislative and regulatory framework in the coming months.

Progress in implementing other initiatives to strengthen the Canadian financial system can be found in Table 2.16.

Table 2.16
Improving Access to Financing and Strengthening Canada's Financial System

	Total Financing Available	Authorities in Place	Financing Provided Until Now
	(billions of dollars)		(billions of dollars)
Insured Mortgage Purchase Program	Up to 125	Yes	64
Business Credit Availability Program,  supported by expanded powers and  additional capital for Export Development  Canada/Business Development Bank  of Canada	At least 5	Yes	2.7
Canada Small Business Financing Program	N/A	Yes	0.1
Canadian Secured Credit Facility	Up to 12	Yes	12
Canadian Lenders Assurance Facility	N/A	Yes	–
Canadian Life Insurers Assurance Facility	N/A	Yes	–
Modernization of Bank of Canada authorities	40	Yes	40
Canada Mortgage Bond	Up to 10	Yes	8
Advisory Committee on Financing	N/A	Yes	–
Canada Deposit Insurance Corporation   authorities and mandate	N/A	Yes	–
Expanded powers for Minister	N/A	Yes	–
Recapitalization/equity investments in banks	N/A	Yes	–
Measures to protect consumers  regarding mortgage insurance	N/A	Yes	–
Consultations on leasing powers	N/A	Yes	–
National task force on financial literacy	N/A	Yes	–
Improving the legislative and  regulatory framework for  federally regulated pension plans	N/A	Yes	–

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² International Monetary Fund, 2009 Article IV Mission to Canada: Concluding Statement (March 9, 2009).

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